Pending Home Sales fell 1.3% in April, according to the NAR. Rising prices plus falling affordability are translating into lower sales for the second straight month. Sales are below a year ago. While building (or lack thereof) continues to be a problem, professional investors who are still paying the REO-to-rental trade are not selling.

JP Morgan and Bank of America warned this morning that Q2 numbers will be lower than a year ago. A flattening yield curve, along with a lack of volatility is hurting results. The S&P Financials SPDR (XLF) is down about 1.5% this am.

You hear people sometimes worry about another bubble because home prices have reached their prior peaks. Set aside the argument that bubbles are exceedingly rare psychological phenomenons that only come around every few generations for an asset class. Are home prices really back at bubble levels? If you look at the home price indices like Case-Shiller or FHFA, the answer is yes. However, those indices use nominal (i.e. non-inflation adjusted) prices. And while inflation has been low over the past 10-15 years, it hasn’t been zero either. On an inflation-adjusted basis, home prices are still about 14% below peak levels. Compare the two charts below, one with nominal prices and the other with inflation-adjusted prices:

Nominal:

Inflation-adjusted:

You can see that home prices are still elevated compared to historical averages, but they aren’t back at bubble levels. Housing has definitely increased in price on an inflation-adjusted basis since the mid-70s, however improvements in financing (interest rates, different products etc) have increased people’s buying power and that may account for some of the increase.

Personal Incomes rose 0.4% last month, while personal spending rose the same amount. The PCE inflation index rose 0.2%. All three were in line with expectations, and point to a recovery in the second quarter. The Fed Funds futures are pricing in an 84% chance of a rate hike at the June FOMC meeting, which is only 2 weeks away.

The Fed will also likely begin to lay out its plan to let its balance sheet shrink at the next meeting as well. It looks like they will allow a small portion of their portfolio to run off and they will keep increasing that number every quarter. Note that this could be put on hold if we get into a protracted debt ceiling fight this fall.

Home prices are up 5.8% YOY, according to the Black Knight Financial home price index. The index hit $272k, as strength on the West Coast was offset by weakness in the Deep South. The Case-Shiller HPI came up with the similar numbers as well. Meanwhile, housing demand remains strong, according to Redfin, as inventory remains tight and new listings draw in buyers from the sidelines. Despite these market dynamics, home building remains stuck at recessionary levels. It does open up the possibility of more cash-out refis though.

US credit scores hit a 12 year high this Spring as consumers continue to improve their financial situations by saving more and borrowing less. Interesting tidbit: More than 6 million families will have personal bankruptcies fall off of their credit reports over the next 5 years. Chapter 7 and 13 personal bankruptcy filings hit 1.5 million in 2010. That will be an additional source of mortgage demand in addition to Millennial first time homebuyers.

Neel Kashkari discusses bubbles and the Fed. I found this part fascinating: “When I went to Treasury in July 2006, then-Treasury Secretary Henry Paulson declared to his staff that the U.S. economy was due for some form of crisis. He didn’t know where it would come from but, because markets had been stable for some time, history suggested something would happen. So he tasked his staff (including me) to work with the Federal Reserve and Securities and Exchange Commission to look for signs of trouble. We looked at a variety of scenarios, from an individual large bank running into trouble to a hedge fund blowing up. Sadly (and embarrassingly), we never considered a nationwide housing downturn. We missed it, and we were looking. It seems obvious now. This was clearly a “false negative.”” As the real estate bubble was peaking, the Fed looked for a catalyst for a crisis, and didn’t see the housing bubble. I know hindsight is 20/20, but that is an astounding admission…

Stocks are lower this morning on no real news. Bonds and MBS are flat.

Today looks to be a relatively slow day ahead of the 3 day weekend. Markets should become illiquid in the afternoon as most of the Street will be on the LIE by noon.

First quarter GDP was revised upward from 0.7% to 1.2% in the second revision. Consumption was revised upward from 0.3% to 0.6% and PCE inflation was revised downward from 2.3% to 2.2%. The upward revision to GDP was higher than expected. The current tracking estimate for Q2 is around 3%.

Corporate profits rose 12% YOY in the first quarter. For all of the handwringing over stock market valuations, the underlying profitability of Corporate America remains strong.

After this morning’s data, the implied probability of a June hike increased 4% to 87%.

Larry Summers is sticking with his “secular stagnation” thesis. He views secular stagnation as the defining economic issue of our times, and believes that governments aren’t doing enough fiscally to break out of it. He does raise a good point about the early 2000s: We had a huge trade deficit, tax cuts, super-easy credit, mid single digit unemployment, and a housing bubble. Yet all the economy could manage was adequate growth. With all of that stimulus, the economy should have been roaring like the late 90s. What is causing secular stagnation is anyone’s guess, but his Rx is infrastructure spending and fiscal stimulus.

Stocks are higher after the FOMC minutes came in a little more dovish than expected. Bonds and MBS are up as well.

The FOMC minutes were mildly bond-positive, as they introduced doubts as to the scope and timing of fiscal stimulus: “Many participants continued to view the possibility of expansionary fiscal policy changes in the United States as posing upside risks to their forecasts for U.S. economic growth, although they also noted that prospects for enactment of a more expansionary fiscal program, as well as its size, composition, and timing, remained highly uncertain.” One member (probably Neel Kashkari) also wanted to wait until inflation was closer to 2% before making any further moves. Bonds rallied a few basis points on the minutes, and the implied probability of a June hike dropped from 83% to 78% briefly before returning to 83%.

Initial Jobless Claims rose slightly to 234k from 233k last week, which is still extraordinarily low. This is 4 straight weeks below 240. The last time that happened was 1973. When you consider that (a) we still had the Vietnam draft at that point, and (b) population growth since then (52%) it is an extraordinary number.

Delinquencies rose in April, according to Black Knight Financial Services. The calendar may have played a part however as April ended on a Sunday, and most of the DQs were early-stage. The number fell to 4.08%, a drop of 3.58% YOY.

Given the big increase in home price appreciation, many FHA loans done at a 97 LTV might have enough new equity to refinance into conventional loans with no PMI. Loan officers, take a look at your past deals, and if you have a FHA loan, take a look to see if you can save some money.

Stocks are lower this morning after Moody’s downgraded China’s sovereign credit rating overnight. Bonds and MBS are up small.

Existing Home Sales dropped 2.3% in April to a seasonally adjusted annual rate of 5.57 million. Tight inventory remains the biggest problem and pushed days on market to a record low of 29 days. Inventory is 1.93 million homes, down 9% YOY and represents a 4.2 month supply. The first time homebuyer accounted for 34% of all sales, while the median home price rose 6% to 244.8k, which has pushed the median house price to median income ratio to 4.1x, which is straying back towards the bubble years.

Home prices rose 1.4% in the first quarter and are up 6% YOY, according to the FHFA House Price Index. The biggest annual increases were in DC, Idaho, New Hampshire, Colorado, and Washington. New England is beginning to show some signs of life after lagging the rest of the country post-crisis.

Mortgage Applications rose 4.4% last week as purchases fell 1% and refis rose 11%. The refinance share of mortgages rose to 44% from 41% the week before. The contract interest rate on conforming mortgages fell 6 basis points to 4.17% the lowest since November. The 10 year bond yield fell 9 basis points to 2.23% for the week ending May 19.

We will get the FOMC minutes from the April meeting this afternoon at 2:00 pm EST. Be careful locking around that time as we could see some volatility.

HUD’s statement on the proposed budget. HUD is getting $500 billion in new commitment authority for FHA. The Community Development Block Grant program is slated to be defunded, while most other activities continue intact. Rental Assistance is also unchanged.

Speaking of HUD, Ben Carson hinted last week that he intends to widen the number of condos which will be eligible for the FHA’s condo program. The biggest change will be to allow financing of individual units in buildings that lack FHA certification. Only 7% of condo buildings have FHA certification so this could open up the program quite a bit. Overly strict regulations issued by the Obama administration more or less put the FHA condo program in a dormant state, however the outgoing administration suggested some tweaks in the final months to try and get more loan volume.

Zillow is facing a class action lawsuit over its Zestimates. A homeowner in Illinois is charging that Zillow’s Zestimimate undervalued her house and and that Zestimate constitutes an appraisal under Illinois law. The suit seeks to have her Zestimate changed to reflect what she wants it to be, to have Zillow licensed and to require the consent of the homeowner before the estimates are posted online.

Comp values exceed the appraisal price on 61% of all appraisals, according to CoreLogic. While in theory this should push appraisal prices higher, adjustments by the appraiser negate this to some extent. You would think in a rising real estate market, the comps would generally be lower due to timing differences, but they aren’t.

Dave Stevens from the MBA discusses what to do with the GSEs. The punchline: The current situation is untenable, as the GSE’s capital buffer will be gone by the end of the year. The recap and release option without any sort of reform is no solution either. The MBA fears that a more conservative (i.e. someone who wants a smaller Federal role in the mortgage market) FHFA director could be nominated when Mel Watt’s term expires in 2018.

Stocks are higher this morning despite a terrorist attack in the UK. Bonds and MBS are up.

New Home sales came in at 569,000, lower than the 620,000 estimate. The median new home sale price was 309k. The average was 369k. New Home Sales are still lagging population growth.

The Richmond Fed Manufacturing Index declined in April as well.

The DC Appeals Court will hear arguments Wednesday to reconsider its decision that the current structure of the CFPB is unconstitutional. If the CFPB loses its case, it will probably have to be re-worked, with a committee instead of a single director who will be accountable to the President. Trump has said he isn’t in favor of killing the agency, but would like to make some modifications.

Merrill Lynch is taking down its inflation forecasts for the year. They are taking their estimate for end of 2017 CPI to 1.9% from 2.3% and its estimate for core PCE to 1.7% from 1.9%. The core PCE is the inflationary index the Fed targets. Merrill is identifying some transitory drivers, so they expect inflation to return to target levels in 2018. Don’t forget, we will get the FOMC minutes tomorrow, which will give some further color on what the Fed was thinking last month, especially given the political environment in DC. Their Fed Funds forecast was based on an assumption that fiscal stimulus will get passed, and that looks impossible at this point.

Minneapolis Fed Head Neel Kashkari wants to see more data before making a decision on a June hike. The June Fed Funds futures are factoring at 78% chance of a 25 basis point hike. Note as well that the yield curve continues to flatten from its post-election steepening. The twos-tens spread (basically the difference between the 10 year yield and the 2 year yield) is the lowest since October.

Trump outlined his proposed budget, which cuts domestic spending by $3.6 trillion over 10 years. His budget doesn’t touch Social Security, Medicare, or defense. This is largely an ideological document that will never pass – in fact one of Obama’s proposed budgets couldn’t muster up even one Democratic vote. There is talk that the budget will cut HUD’s Community Development Block Grant Program, which runs Meals on Wheels and also doles out money for things like bike lanes, public spaces, etc. Based on trial balloons floated earlier in the administration the rest of HUD’s budget looks like it will be untouched.

Stocks are flat this morning on no real news. Bonds and MBS are down small.

Economic activity picked up in April, according to the Chicago Fed National Activity Index. It rose to .49 (better than expectations) and the 3 month moving average rose to .23. Production and employment led the rise, while personal consumption and housing were negative.

We have some Fed-speak at 10:00 EST today along with a bunch after the close. The biggest events this week should be the FOMC minutes on Wednesday and the second revision to Q1 GDP on Friday. We will also get a lot of housing data this week.

One of the biggest issues for the Fed is wage inflation (or the lack thereof). The last time unemployment was this low, we were experiencing 4% wage growth. Why aren’t we now? Here are a few explanations. They revolve around a few different theories. The first is that there has been a structural change in labor economics, and that the tradeoff between unemployment and inflation is over due to globalization, lack of union representation, etc. The second explanation is that wage negotiation dynamics have been colored by the economy since 2008: employers are training people internally instead of hiring outside at a higher price, employees don’t feel comfortable asking for more, productivity is lousy, and the huge reservoir of the long-term unemployed means the market is not as tight as it may appear. The final one is a measurement problem: that the BLS numbers aren’t accurately reflecting the reality of the marketplace. Take construction: Builders constantly complain that they can’t find skilled labor, that they are offering signing bonuses, etc yet when you look at the actual BLS numbers, construction wages are only growing 2.1%. We are seeing in the mortgage business with ops folks as well. So maybe we are starting to see pockets of wage growth, however it isn’t showing up quite yet in the rest of the economy or the numbers.

The drop in construction spending hasn’t only been in housing – it has also been in schools. State and local governments are spending about 1/3 less on school construction than they did before the crisis, yet enrollment is up 4%. This is just another problem for the first time homebuyer – finding affordable homes with good schools.

NAR is predicting 5.6 million home sales in 2017, up 200k from last year, and new home sales of 620k, up from 560k last year. GDP will grow at 2.2% and inflation will remain tame. Sales would be higher if there was more inventory, and the group hopes that regulatory changes, especially with Dodd-Frank will ease up credit for smaller banks, who fund local homebuilders.

Now that the REO-to-rental trade is largely played out, Wall Street is now building houses for rentals. Some are planned communities, where renters get the benefit of living in a single family detached homes, plus they get some of the advantages of apartment living, with gyms and common spaces. They also don’t have to deal with maintenance. Interestingly, many people intend to rent for only a short time period, but end up staying. For one landlord, 1/3 of the tenants have been on month-to-month arrangements for 7 years. The REITs behind this trade also get discounts from builders, lower maintenance costs, and about a 5% – 8% pickup in rental income for a new house.